IPDI trust – investment bond and life tenant’s entitlement to income

[Marky Mark]

My late husband’s will created an IPDI trust. I am the life tenant and his daughters are the trustees and remaindermen. Following the sale of the property in the trust, approximately £300k of trust capital will be invested.

The will states that “any capital left over from sale of my house shall be invested by trustees to provide an income for me.” There is no provision for capital to be appointed to me as the life tenant.

We have received conflicting advice about whether the trustees can invest the trust capital in an investment bond. Some advice says an investment bond is simply an investment vehicle and can be used by the trustees; other advice suggests that doing so could alter the nature of the IPDI or breach the terms of the IPDI.

Can trustees of an IPDI invest the trust fund in an investment bond where the purpose stated in the will is to provide income to the life tenant? If so, can withdrawals from the bond be paid to the life tenant as trust income, and what restrictions apply to capital withdrawals? Would there be a CGT to pay on the investment bonds when the life tenant dies rather than shared IHT as it currently stands?

[AGoodman]

Assuming the investment bond in question is a life insurance product, rather than just a long term bank or National Savings deposit, there are three steps to this:

- yes, the trustees probably have power to invest in an investment bond under s.3 of the Trustee Act 2000 - the precise answer would depend on the provisions in the will.
- however, the returns from an investment bond are generally considered to be capital for trust law purposes and so none of them would accrue to you, even if they incur income tax.
- the trustees’ have a duty to strike a fair balance between capital and income beneficiaries which must inform their investment decisions (see e.g. Nestle v National Westminster Bank plc [2000] WTLR 795).

Accordingly, they could invest some funds in an insurance bond but their overall investment policy would have to be fair to you - producing a reasonable income overall, possibly depending on your needs. Even a (relatively high) 5% return overall would only produce £15k p.a. so it is difficult to see how they could produce much of an income if a portion of the trust fund is invested in non-income producing assets. I doubt that the words you have quoted are taken directly from the will but, if they are, or those words are in a letter of wishes, the trustees would likely be expected to invest the entire fund in income-producing investments.

So, yes, the trustees technically have the power to invest in an investment bond but if it prevented you receiving a "fair" income (in all the circumstances) then such an investment could be a breach of trust by the trustees.

[Marky Mark]

Dear AGoodnan

Thank you for your comprehensive reply. Firstly, yes, the investment bonds suggested to us are the insurance type bonds.

The will includes two trusts, one is discretionary and allows for capital to be distributed from the letter of wishes. The second trust relates to the property, now sold. The relevant paras for this trust in the will are below:

“ 4.6 Any surplus arising from selling the Property and buying the other property will be invested to provide an income to my wife x for the remainder of the trust period.

* 8.0 STEP Provisions
The standard provisions and all of the special provisions of the Society of Trust and Estate Practitioners (2nd Edition) apply to this Will.”

There is no provision for distributing capital to the life tenant.

Apologies for being naive but are you saying that-
1. As there is no provision for distributing the capital to the tenant, it would be a breach of the trust to do so? In this case it would be selling (insurance) investment bonds.
2. If we were to agree to investing in these bonds, sell 5% annually to provide an income for the tenant, this would breach the trust rules?
3. Would the trust could be treated as discretionary for tax purposes, potentially, if we acted as above?

[AGoodman]

To reverse the order of your questions:

2. If there is no power to pay capital to the life tenant, then the proceeds of an insurance bond couldn't be paid to the life tenant. The trusts would require them to be held for the remainder beneficiaries and paying them to the life tenant would be a breach of trust.
1. As mentioned earlier, the trustees are required to generate income for the life tenant. An insurance bond wouldn't produce income
3. No, the trustees would just be in breach of trust and liable to a claim from any reversionary beneficiary.